If you are at the point where you are ready to grow your company multiple times, then this series of blog post is for you. They will answer the question “What percentage of my company do I have to give up to investors to get the funding I need to grow to my vision?”
After having raised millions for Main Street companies, in my experience, there are five steps necessary to get to funding:
- Use our free LDFH Negotiator Valuation tool
- Consult our Funding Experts
- Learn how to increase your valuation
- Navigate to the best funding sources
- Get Funded
Each step is outlined in a blog post.
Let’s begin. Before using the LDFH Negotiator Valuation tool, there are some things you need to have in hand:
Use of Funds – (You can use ours – in your free tools!)
Part 1 Use of Funds – How much money do you need and when
Like many Entrepreneurs and Founders, growing your company is about more than just business. After interviewing hundreds of business owners, coming from a business family myself and having run several businesses, I know that most Founders are into their companies for more than the money. The company is often an extension of themselves and that is why they can find the passion to overcome the many challenges, from human resources to financial, and still get up each morning loving what they do.
Some of the times when I have personally been happiest is when I see customers really understand the value that I am giving them from my product or service. In fact, the company becomes like a part of the family, a very needy part of the family, and takes on a personality of its own. And that personality often matches the culture that you have put into it. And you know you have a recipe for success not only from repeat business but some people who ask if your product or service is available in their area.
When you have more business than you can service or produce products for, you know that you have a winner. And so, it’s time to take a serious look at how to grow your company. You will quickly realize that in order to grow, you need more money. But how much money? And where to spend it to get to which business goal? Most people know their business very well and when they come to us, they would say something like “I need $5 million to accomplish my business goals. How can you help?”
I once worked with a restaurateur, let’s call him Chef, who after raising funding for him he was able to grow from a caterer to a multi location owner. I think sharing his journey might help you to understand the process that leads to a valuation that the market accepts. When I met Chef, he already had a very profitable takeout. He was already in his early 50s. He had spent many years learning the business of restaurants starting by being a chef and finally managing some famous local chains of which he was not the owner. He was currently running a very popular takeout where he had built a brand based on an old product with a twist. People came from miles around for lunch. Lines were always long, and the staff was friendly but somewhat inefficient.
Chef had started under a tent as a vendor at an athletic competition. After receiving rave reviews, he had been encouraged to open the takeout and now he wanted to share his product with the world. He was very ambitious and told me he needed 3 million dollars in order to open multiple restaurants, a distribution center, and even to franchise the brand. So, the first thing I had to do was sit my team down with him to learn the story of his business and what his vision was for its growth.
The question Chef asked was “how much of my company would I have to give up to investors in order to get the money I need to grow my business to my vision?” This in fact is the most common question that business owners ask when thinking of taking on investors. The reality is most people asking this question have already had exploratory conversations with Angel Investors who for the most part want a huge chunk of their business and a controlling interest. Or they have borrowed as much money as they can and some have even gone the route of hard money lenders and are paying extremely high interest rates
I explained to him that before we can answer that question, we have to get a valuation which involves the following process: First find out how much money you need and what is the timing of it. Next, have your business valued to give you a range of what is a likely outcome. Finally get a professional valuation.
Finding out how much money you need and when is largely an internal exercise. It begins with prioritizing your business needs and their impact on your financial statements. I suggest the following exercise. Take the free valuation on our site, use our free Use of Funds tool – fill in the information on your company paying attention the three top areas that greatly impact your business such as; new or more efficient machinery, additional locations, additional human resources etc. Then input a dollar figure of what you think it would cost to implement them. Next input what the selected area would have on the monthly cash flows of the business. Notice that the list is prioritized. You are the one who understands your business best and you should be the one intimately involved in this exercise. You will be able to login later and adjust these top three areas and their impact later so you can use it as a forecasting tool adjust them according to your business.
In the case of Chef, he had determined that the first thing he needed was a distribution center for his secret sauce. This would cost him about $150,000. This distribution center would allow him to ensure that wherever he was selling food he would have the same quality as it would be prepared centrally at this distribution center and transported to the various new restaurants.
Then Chef determined that he would need more restaurants and a food truck. Each additional restaurant would cost him about $100,000 in rent and lease hold improvements. Chef projected that with the addition of the distribution center and one additional restaurant he would more than double his revenues. So, the initial goal was to invest $250,000 and improve business by a growth factor of 2, in other words100%. And Chef was wrong! We raised $250,000 for him and he was able to exceed his revenue targets. The distribution center along with the new restaurant allowed him to get his unit economics down. With these figures he could more easily financially forecast what his business would be valued at each milestone. We were able to assist him to draw a financial roadmap. And more importantly to come to be able to forecast what his company would be potentially worth at each stage as he implements his vision.
Assisted by these and other results LDFH developed a tool that is useful for forecasting cashflows and negotiations and will be the subject of my next blog post. Get access to our Use of Funds tool found in our Toolbox and get access to the LDFH Valuation tool.